AM Best revises US commercial P/C business to stable from negative
AM Best is revising its outlook on the commercial lines segment of the US property/casualty industry to stable from negative for 2018, citing an embedded change in the sophistication of the segment’s pricing and underwriting infrastructure and the segment’s resilience amid a variety of macroeconomic and insurance market issues in recent years.
The Best’s Briefing, called, “Market Segment Outlook: US Commercial Lines,” notes that while the pricing environment remains challenging and other headwinds persist, most companies in the segment have adopted tools that allow for greater insight into business profitability.
AM Best, which has had a negative outlook on the commercial lines segment since the start of 2011, expects the segment to post an underwriting loss for 2017, but still record net profits, driven primarily by investment results.
The report notes that catastrophe losses nearly doubled compared with 2016; however, through early fourth-quarter 2017, they generally were within companies’ risk tolerances and the retentions of their catastrophe programmes, reflecting the appropriateness of the segment’s enterprise risk management.
Particularly for the segment’s leading companies, changes in underwriting and pricing fundamentals have resulted in core underwriting results that coupled with overall strong risk-adjusted capitalization levels are allowing companies to absorb shock losses that previously would have strained capacity.
Although AM Best believes that reserves for the commercial lines segment are deficient, this deficiency is very modest relative to the overall reserve balance, particularly if the effect of statutory discounting is removed. While the amount of favourable reserve development has generally declined over time, the expectation is that loss reserve development for 2017 will be favourable overall for the segment.
Despite the outlook revision to stable, AM Best notes that challenges persist and could drive longer-term deterioration for the segment. These challenges include investment yields and reinvestment rates that are still lower than rates on maturing and called securities; ongoing competitive pressures given the level of capital in the segment that may make it difficult to achieve necessary rate increases; decreasing levels of favourable prior-year development; and continued challenging results in the commercial automobile and certain other liability lines of business.
A rapid change in any of these areas could drive a review of the outlook during the year, but AM Best currently is not anticipating substantial deterioration in the market in 2018.
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